This isn't as bad a headline number as was widely feared; note, though, the large positive contribution from inventory build-up. Imports and exports were both way down, but in a very nearly canceling fashion. Every single subcategory of fixed investment was negative. Food was substantially negative; this could mean that people are actually eating less, but it seems more likely to me that it reflects substitution into cheaper food. I wonder whether I can dig up more detail on that.

This is kind of what you might call "in beta"; it's something I've been meaning to design for a couple years, and it's recently become less useful, insofar as fed statements have become less "stable" — a year and a half ago (actually, even 6 months ago) there would have been a lot less of the editing notation. As for these days, I was a little surprised when I ran it through that they had preserved as much as they had; when I read the statement, it looked to me as though they had started fresh, but in fact there are a number of phrases from last time that are preserved. Anyway, this tool might be more useful in March.

Update: I'm revising this February 3, with some improvements to the algorithm.

The Federal Open Market Committee decided today to establish akeep its target range for the federal funds rate ofat 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activityInformation received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weakerin recent months and the prospects for economic activityconsiderable economic slack, the Committee expects inflation to moderate furtherthat inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

The focus of the Committee's policy going forward will beis to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustainare likely to keep the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters theThe Federal Reserve willcontinues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securitiesthe quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee is also evaluating the potential benefits of purchasingalso is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. Early next year, the The Federal Reserve will also implementbe implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal ReserveCommittee will continue to consider ways of using itsmonitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

Merrill Lynch economist David Rosenberg’s version of the rule suggests that the right target rate for the Fed would be a negative one percent in the coming year. Former Fed governor Laurence Meyer of Macroeconomic Advisers reckons the rule calls for a rate of negative 4% or lower. Goldman Sachs, with its estimate of 9.5% unemployment and a 0.25% core inflation rate by the end of 2010 suggests that by next year the appropriate target rate for the Fed will be a negative 6%.

The Taylor rule suggests that the appropriate* interest rate is a linear function of the "output gap" and the inflation rate; the "output gap", as noted at the link, is hard to measure, but essentially means "the extent to which the real economy is underperforming". (I happen to like a time derivative of the unemployment rate, but I'm not an expert. Yet.) The coefficient on inflation should exceed 1†; this is called the Taylor principle, and means that the real interest rate should be higher if inflation is higher, so as to attempt to reduce aggregate demand (this is the way it's usually formulated) to rein in inflationary pressures.

It's usually written that way, in terms of nominal interest rates, in part because nominal interest rates are easier to measure and define and are, at least in the past couple decades, the main policy instrument of the FOMC. The formula can be rewritten, though, subtracting inflation off of each side, so that the real rate is a linear function of inflation and output gap (with the Taylor principle dictating that the coefficient on inflation be positive).‡ At that point an indicated negative real rate suggests a positive inflation target; you can target negative real rates, so long as you have some means other than rates to generate inflation. This is probably what the Fed is going to be attempting for the next year or so; it will be trying to create enough inflation through essentially quantitative means so that a zero nominal interest rate creates a real rate that is as negative as the Taylor rule prescribes.

* I believe the rule was initially stated, at least in part, as a description of what the Fed does as much as a prescription for what it should do. Taylor's arguments in favor of a policy rule do sometimes include claims that the Fed has erred when it has deviated from a Taylor rule, but one of his strongest arguments is that being explicit about what you're doing aids both in passing along institutional knowledge and in helping to refine the practice of policy, giving precision to what has been done in the past and therefore what is likely, perhaps, to be too easy or too tight in the future; another argument he makes is that a policy rule is a good way to frame debate, giving a starting point from which discretion can then take the form of a discussion as to why policy should be easier or tighter than the rule. In each of these more normative arguments, he is making clear that he doesn't believe his simple formula is the endpoint of research in monetary policy.

† Econometric evidence suggests that this coefficient was a bit less than 1 in the sixties and seventies, which may have been part of the problem; since 1982, and particularly since Greenspan took over in 1987, it has been 1.5 or even a bit higher. (I obviously in this context mean it as a measure of what the Fed does, not what it should do.)

‡ When I say that nominal interest rates are easier to measure and define than real rates, I'm implicitly saying that inflation is hard to measure and define. I kind of think, in fact, that the real rate in this latter version of the Taylor rule should be calculated using a full inflation measure, while the inflation on the other side of the equation should be a core inflation measure. I have no real conviction in this belief, though; the problem with full inflation is that it moves around a lot, and if you're trying to set a policy rate for the next six weeks, what you care about is the inflation rate in the next six weeks, not the recent past. Perhaps what I should say is that the inflation that gets subtracted out of the nominal interest rate should be a shorter-term prediction of inflation than the inflation that goes into the linear function.

Labor standards are a luxury rich countries can afford, and there are arguably cultural benefits to setting a minimum for them at some healthy remove from the affordable mean, but there's no sensible morality that would, fully informed, support their being imposed on countries where they aren't affordable.

As for the effect on trade, attempting to export our labor standards will weaken our comparative advantage in capital- and skill-intensive products. In your classic Hecksher-Olin model, this will increase the relative returns to unskilled labor, but at a more than compensating cost to capital and skilled labor; domestic job training programs would likely be better for all large classes of people than would trying to export our labor standards.

The Treasury today announced the call for redemption at par on May 15, 2009, of the 13-1/4% Treasury Bonds of 2009-14, originally issued May 15, 1984, due May 15, 2014 (CUSIP No. 912810 DJ 4). There are $4,481 million of these bonds outstanding, of which $3,459 million are held by private investors. Securities not redeemed on May 15, 2009 will stop earning interest.

These bonds are being called to reduce the cost of debt financing. The 13-1/4% interest rate is significantly above the current cost of securing financing for the five years remaining to their maturity.

In these difficult times for creditors, a Lithuanian debt collector is offering an unconventional service to retrieve arrears: witchcraft.

The Vilnius-based firm has hired Vilija Lobaciuviene, the Baltic nation's most famous self-styled witch, to hunt down companies and individuals who are failing to pay their debts amid the credit crunch.

I just saw a TV commercial indicating that Hyundai is making the following offer: if you buy a car from them and lose your job within the next year, you can return it. Hyundai sells a product that is likely to be constitute a large on-going financial commitment to many potential customers, and they can offer insurance against a risk that might dissuade people in a risk-averse environment from making a purchase. Particularly in this environment the risk is likely to be cheaper to Hyundai than it would be for the buyer. This strikes me as a great idea.